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The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates

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  • Lane, Philip R.
  • Milesi-Ferretti, Gian Maria

Abstract

The relationship between international payments and the real exchange rate - the ‘transfer problem’ - is one of the classic questions in international economics. In this paper we use cross-country data on real exchange rates and a newly constructed data set on countries’ net external positions to shed new light on this old question. We present a simple theoretical framework that leads to empirically testable implications on the long-run co-movements of real exchange rates, net foreign assets, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. We show that on average countries with net external liabilities have more depreciated real exchange rates, and that the main channel of transmission seems to work through the relative price of nontraded goods, rather than through the relative price of traded goods across countries.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2511.

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Date of creation: Jul 2000
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Handle: RePEc:cpr:ceprdp:2511

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Keywords: Net Foreign Assets; Real Exchange Rates; Terms of Trade;

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References

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